Technology

Yahoo's Yodel Turns Into a Whimper

Layoffs and a refocusing effort can only do so much. CEO Jerry Yang needs to find exciting new products or services if he hopes to make Yahoo sing again

At the Consumer Electronics Show a few weeks ago, Yahoo! (YHOO) Chief Executive Jerry Yang kicked off his keynote speech with a vow: "It is time to get Yahoo yodeling again." But on Jan. 29, after Yang issued a muted outlook for the coming year, including the layoffs of 1,000 employees, it became clear that the turnaround he wants to bring about won't happen for at least another year.

Yahoo said its fourth-quarter profit fell 23%, to $206 million, on a 14% rise in sales, to $1.4 billion, excluding commissions to marketing partners. But even though that met or outpaced expectations, the company's outlook for 2008 didn't. Yahoo expects revenue of $5.35 billion to $5.95 billion, missing the expectations of many analysts, whose average forecast is for sales of $5.88 billion. "The outlook was the real disappointment," says Rob Sanderson, an analyst at American Technology Research. "They threw in the kitchen sink in terms of reducing expectations."

The stock reeled in extended trading, dropping more than 10%, to $20.81. Even before the report was released, Yahoo's shares were trading at their lowest level in more than four years.

Even as top-line growth fails to meet some projections, spending on efforts to keep visitors glued to the portal could crimp bottom-line growth, too, at least in the near term. Yang expects to continue investing in such areas as Yahoo's home page, its personalized MyYahoo service, e-mail, and mobile features. He also plans to keep spending to improve search as well as to create better technology for marketers to buy both search and display ads on Yahoo. "This sort of transformation takes time," Yang said on an earnings call with analysts. "We are taking an aggressive investment posture. Increased investment is the only appropriate measure at this time."

A Big Ax in Europe

Investors also may be disappointed that Yang, who took over last July with the departure of longtime CEO Terry Semel, didn't make deeper cuts in Yahoo's staff. Some press reports suggested the cuts would affect as many as 2,500 people. The layoffs will mean a charge of up to $25 million in the first quarter, but they could save the company $100 million a year in expenses.

Yang said the cuts, which will come in mid-February, will be not across the board, but selective, focused on areas that aren't doing as well as others. One Yahoo executive told BusinessWeek that sizable cuts probably would come in Europe. Yahoo also has already deemphasized or closed lagging operations such as music subscriptions, photos, and a social-networking service called Yahoo 360.

Analysts had hoped that Yahoo's results might offer clues as to whether the economic slowdown will hit online advertising. The concern is that companies such as Yahoo and Google (GOOG) will suffer from pared marketing budgets. Some analysts also fret that cash-strapped consumers will reduce spending, in the process clicking on search and other ads less often, which also would mean less revenue for the likes of Yahoo and Google. Indeed, this possibility, coupled with small declines in Web search activity in December, prompted investment bank Stanford Group in Houston to cut its Google stock rating to "hold" from "buy" on Jan. 24. "Advertising-driven media typically slows down in a recession, so online advertising should decline in a recession, ultimately," says Stanford analyst Clayton Moran.

Online Resilience?

Others, however, believe online ads are at least somewhat insulated from a slowing economy. The idea is that an influx of marketing dollars, redirected from television and print, would more than compensate for any economy-related slump. For instance, chipmaker Intel (INTC) expects to spend at least half of its marketing budget online this year, compared with just 15% two years ago, because the Web helps it better reach people who buy computers with Intel chips in them. "We really want to get close to that sale" with search and online display ads, says Corey Carrillo, Intel's worldwide search-engine marketing manager. Historically, the company has emphasized its brand.

Yahoo executives said there were some areas of weakness in display advertising, such as finance, travel, and retail. President Sue Decker implied that was probably due to the slowing economy. But she said the weakness was largely offset by strength in other areas. Yang said display-ad revenues strengthened in the second half of last year, growing 20%.

Yahoo said its search advertising grew 30% from a year ago. What's more, Decker said revenues per search query grew 20%, about the same gain as in the third quarter. She attributed the bulk of the growth to improvements in the rate at which users click on search ads, thanks to Project Panama, the company's search-ad effort launched about a year ago. But none of that has kept Yahoo from falling further behind Google.

With Yahoo failing to attract a larger base of searchers, advertisers hesitate to spend significantly more on its search ads. "We give them every dollar we can," says Kevin Lee, executive chairman of digital marketing firm Didit. "But if they don't have the traffic, there's nothing for us to spend the money on." Indeed, Yahoo keeps losing ground in search to Google. According to Nielsen Online's numbers, usually the most conservative measure of the market, Google's share of searches in December was 56.3% to Yahoo's 17.7%, and Google got 70% more searches per searcher than Yahoo.

Marketers know it, and that's why they're still not spending big on Yahoo search. A new analysis by search marketing firm Efficient Frontier says overall search ad spending on Yahoo fell 3.8% in the fourth quarter from a year ago. As a result, Google's share of search ad spending rose to 76.6% from 70.5% a year ago, essentially capturing 97¢ of every additional dollar spent on search advertising in the past year. "Google continues to be the big engine that could," says Efficient Frontier CEO Ellen Siminoff.

Cuts Alone Aren't Enough

Yahoo also faces challenges in other areas of its business. A deal with AT&T (T) had given Yahoo a monthly fee for each broadband subscriber it attracted. Now, Yahoo will get only a share of revenue for ads it sells on AT&T sites. Although it gets a one-time payment of $300 million to $400 million from AT&T this year, the new deal will cut Yahoo's guaranteed revenues, which analysts had estimated at about $250 million a year.

As Yang's vow to keep spending on some initiatives indicates, Yahoo's hope remains coming up with new services that catch people's imagination as Google, MySpace (NWS), Facebook, and other sites have. "You can't cut your way to prosperity," notes Siminoff. But when Yang took over as CEO last July, he promised he'd spend the next 100 days crafting a new plan for the company. At nearly 200 days and counting, investors clearly believe he needs to pick up the pace.